Improved Hospital Finances Are Not What They Seem As Malloy Cuts Loom

New figures show improved margins at CT hospitals just as Malloy takes aim, but are the profits for real?

In the heat of a battle over state support for hospitals, new financial figures appear to show exactly what Gov. Dannel P. Malloy has been saying: The hospitals are doing fine and can withstand more deep cuts.

The 28 hospitals that reported financial data for the most recent fiscal year posted average surplus margins of 4.4 percent from regular operations, up from 3.2 percent in the prior year.

That average is well within the healthy range, where the hospitals — all but one of them nonprofit — can maintain operations and reinvest enough to upgrade buildings and technology.

But a close look at the numbers compiled by the state Department of Public Health shows that the year-over-year gains in fiscal 2014, which ended Sept. 30, are not widely shared and in many cases are based on one-time savings and cost cuts that won't easily happen again.

From Backus Hospital in Norwich, with the biggest 2014 surplus margin at 16 percent, to Milford Hospital's 11 percent deficit, the range includes many institutions that remain troubled. Five posted overall deficits in 2014, including investment income, up from four in 2013.

The number of hospitals with operating surpluses under 4 percent was 16 in fiscal 2014, same as the year before. That does not include Johnson Memorial Hospital in Stafford, which reported a 2013 deficit of $3 million, or 4.9 percent, before filing for bankruptcy. Johnson has not filed financial data for 2014.

Executives at the hospitals and their statewide lobbying group say Malloy's proposed hit of $753 million over the next two years — a combination of Medicaid reimbursement cuts and higher taxes — would strike an unfair and in some places crippling blow at a public service industry that's not strong financially.

"Essentially the improvement in margin performance is directly related to a significant holdback in operating expenses," said Stephen Frayne, vice president of health policy for the Connecticut Hospital Association. "Their operating performance might be up slightly, but they're doing that in an environment that I would say is significant duress, and they're going to have even more duress if this budget passes."

The positive overall numbers include a $236 million, 2.4 percent, gain in net patient revenue, which reached $9.9 billion. That's partly a testament to Obamacare, as more people have coverage through private insurance and Medicaid.

Expenses across the board were up by an astoundingly low one-third of 1 percent, resulting in a $664 million combined overall surplus at the hospitals, up from $600 million the year before (with Johnson not included).

Fifteen hospitals reported operating margin increases of 1 percentage point or more. Nine had declining margins, including six that fell by more than 1 percentage point.

Malloy and his budget chief, Ben Barnes, say the hospitals must do more restructuring and consolidating. They say the state's tax and reimbursement plans represent a leveling off of Medicaid spending that had grown unsustainably until three years ago.

"Payments to hospitals under the state Medicaid program are expected to be about $1.8 billion this year," said Gian-Carl Casa, spokesman for the state policy and budget office. "Ten years ago ... they were $785 million."

Malloy and Barnes say the hospitals are benefiting from higher numbers of people with medical coverage, as we see in the latest reports. And they say that in some cases the hospitals' parent systems are doing better than the hospitals themselves — a complex debate in itself.

Casa, pointing to the $664 million surplus in fiscal 2014, said, "While we understand their concerns, the budget reality is that tough decisions have to be made now."

It's certainly possible that the hospitals could continue to see added revenue, and clearly they will continue to see more mergers and perhaps a closure or two. Malloy is not wrong to tighten the screws a bit and force the hospitals to cut expenses faster than they might otherwise.

But the numbers simply don't support anything close to a $750 million hit. The improvement in 2014 amounted to a $64 million boost in the surplus — just a fraction of the amount the hospitals stand to lose in the Malloy budget.

Frayne, at the hospital association, points out that that amounts to a tax on net earnings many times higher than the tax for-profit companies pay.

And as small as the improvement is compared with the looming cuts, it isn't all real. It includes big, one-time changes at the state's two largest hospital systems.

Hartford HealthCare, parent of Hartford Hospital, Backus and three others, moved its physician practices and their expenses under the corporate umbrella. Backus melded with the system in 2013, cutting its 2014 costs. All of that, combined with two rounds of layoffs and some new facilities, drove surpluses way up in ways that can't happen year after year.

Similarly, after Yale-New Haven Hospital took over the Hospital of St. Raphael in late 2012, it realized savings that appeared in 2014 and won't happen again.

As for the added revenue, it's a mixed blessing for the hospitals. Medicaid reimbursement falls well short of the cost of services, so that $1 billion increase over the last decade is hurting hospitals, not helping. And although fewer people walk through the doors with no insurance, many of those whodo have coverage can't pay their share.

The latest numbers appear to show that added patient revenue is a boost to profits — or surplus, as the nonprofits call it. But it's only going to a few places.

Just six hospitals — Yale-New Haven, Hartford, Bridgeport, Greenwich, Backus and Lawrence + Memorial in New London— accounted for 90 percent of that $236 million patient revenue increase, and most of the added surplus in the whole system.

Those six hospitals would have been even more dominant if not for a late-2013 strike that cost L+M an estimated $14 million. That, of course, cuts both ways: Without that L+M strike and its cost, the average margin of the state's hospitals would have risen even more.

The point is that the 4.4 percent headline number that will ricochet around the state Capitol as the fight climaxes in the next few weeks is not a good measure of the hospitals' true health.

At Yale-New Haven, for example, the St. Raphael savings basically offset the higher costs caused by three years of tightening under Malloy. The hospital association estimates the Malloy budget would cost Yale-New Haven another $239 million over the next two years.

"We can't get the savings out of St. Raphael's again," said Vin Petrini, vice president for public affairs at the Yale New Haven Health System. "We can't go back to that well."

Malloy's message to all of them is that yes, they can. He needs to fill a $1.3 billion budget gap. But he's asking for too much, too soon, in a year when he's leaving state employees, gasoline buyers and ultra-rich residents unscathed.